If some or all of your income taxes are too new to be written off, bankruptcy may still provide crucial help, even without Chapter 13.
How could a Chapter 7 “straight bankruptcy” help if all or most of the income taxes you owe fail to meet the conditions for being able to discharge (write off) them?
Chapter 7 may, after discharging all or most of your other debts, set you up to be able to comfortably pay those taxes through a reasonable monthly payment plan directly with the IRS and/or Oregon Department of Revenue (ODR). Or it can set you up for settling those taxes for much less than the amount you owe.
If so, you would avoid the higher expense and hassle of going through a three-to-five-year Chapter 13 case.
Get Rid of Your Other Debts So You Can PAY Your Taxes
Ask yourself this question, and discuss it carefully with your bankruptcy attorney: If you were to file a Chapter 7 case would it clear enough debt payments out of your budget so that you could then afford to make monthly payments to the IRS/ODR to pay off your taxes? Specifically, would you be able to reliably make large enough monthly payments to the IRS/ODR so that whatever taxes you would still owe after bankruptcy would be paid off within a reasonable time?
Paying Directly to the IRS/ODR without Bankruptcy Protection
Be aware that once your Chapter 7 case is finished—usually only 3 or 4 months after it is filed—you would no longer have protection from the IRS/ODR regarding the taxes you would continue to owe. So usually you’d be on your own in dealing with them. That would likely not be a problem if you could afford to consistently pay a monthly amount that they would accept. You need to have objective reasons for being confident that you’d be able to maintain those tax payments until the tax would be completely paid off.
One of the main advantages of Chapter 13 is that you don’t need to deal directly with the IRS/ODR because it’s all taken care of through your 3-to-5-year plan. You’re protected from the tax creditors throughout that time. This continuous protection is especially valuable if your circumstances change and you need to lower your payments, because then you don’t have to try to negotiate such changes directly with the IRS/ODR and hope that they’d be flexible enough. That’s why it’s important that if you choose to go the Chapter 7 route, whatever payment arrangements you make with the IRS/ODR you can pay very reliably.
Pay Off within a Reasonable Time
The IRS and ODR will continue adding interest and penalties throughout the time you are making installment payments. Even if you can reliably pay the necessary payments, consider how much the accruing interest and penalties will add to the amount you must pay before it’s paid off. Realize that in a Chapter 13 case usually no more interest and penalties get tacked on once the case is filed (as long as there is no recorded tax lien). That can save you a lot of money if you owe a large amount of taxes that would not be discharged in a Chapter 7 case.
Get Rid of Other Debts So You Can SETTLE Your Taxes
A similar analysis comes into play for instead using Chapter 7 to position yourself to settle your taxes for less than you owe instead of just paying them in full through monthly installments. The IRS may allow a taxpayer to settle a tax debt through an Offer in Compromise, and the ODR has a similar procedure.
This decision—between filing a Chapter 7 case and then attempting to settle the remaining taxes vs. just filing a Chapter 13 case to handle the taxes—is likely a more difficult one compared to the installment payment decision above. That’s because while it is relatively easy to determine what the IRS/ODR will accept in monthly payments, and how much interest and penalties will accrue during the payment period, tax settlements are much harder to predict. They generally take much more effort to process, more often require the help (and cost) of a professional, take longer to approve, and involve more IRS/ODR discretion.
File a Chapter 7 case instead of a Chapter 13 you could pay the non-discharged taxes through an installment payment plan, one that is reasonable in monthly payment amount and in length, or if those remaining taxes could be resolved with a settlement. Otherwise file a Chapter 13 case for greater ongoing protection and flexibility.